Should I Kill My 401k?

61 Replies

I've been listening to Set for Life, by @Scott Trench .  Great book!  One of the things discussed in the book is how a 401k locks up part of your income, and that if you aspire to reach early financial freedom then a 401k slows you down because you cannot access part of your income.

I'm 27 years old and about 3.5 years post-college.  About 7 months ago I changed jobs, and I was able to cash out my 401k instead of rolling it over to my new employer.  I restarted a 401k with my new employer and currently only have about $900 in the account, so I wouldn't be taking a huge penalty hit or anything like that.  I contribute $42/week, which seems pretty significant on a monthly or annual basis.  Should I kill my 401k so that I can access this $42/week?  Another $168/month does sound really nice, and I do plan to grow a portfolio of rental properties to support myself and my family.  I have one duplex currently and I'm under contract for my second.

Any general thoughts or advice would be great!

Does your employer match contributions?  That is free money.  Usually tax deferred money is the way to go. It can also be good to diversify too--real estate and stocks have low correlations.  Look at the employer's plan.  There are often ways to pull out funds via loan or hardship.

Yes my employer does have a match, I forget what it is honestly.  But in the last 7 months the account has made a whopping $40.  It just doesn't seem worth it to me.

I would not recommend to kill your 401K. It is free money from your employer on the matching part and the growth/gains compound over the years. This is another stream of income. Another basket for your eggs. You want multiple streams of income (even if this stream is only meant for later in life) and you don't want all your eggs in one basket.

If I have a match, I take it, as long as I'd plan to stay at the company throughout a significant portion of the vesting period (if applicable)! I like free money as much as the next guy. Even if you then turn around and liquidate the 401(k), paying the 10% penalty and taxes, it's probably advantageous to take the match at the very least.

The trap for those pursuing super early financial freedom, like before 40 years of age, is that the money in retirement accounts is a bit harder to deploy opportunistically, and people do not intend to use that money as part of their plan for early financial freedom. If you go in with a plan and the proper intent, wealth in vehicles like retirement accounts can be a useful resource towards financial freedom. I think I go into some detail about this in the appendix. 

contribute to the match, I would suggest "roth 401k" if they have that option, given youre age, it will pay off even more in the end when it becomes tax free.

401k's are a scam invented by wallstreet lobbyists. Obviously I'm being obtuse, but the reality is that as an investor, you can make much better use of this money than it can sitting for 40 years in a financial mgmt company's account.

To hell with employer match. To hell with tax deferment. To hell with diversification. REAL estate. Emphasis on the "Real".

I think it depends on what your situation is and what kind of goals you have.  If you are serious about real estate, how much will that additional $2k a year really be worth to you?  If your goal is to grind out a career and retire, 401k is the move.  If your goal is to make a bunch of money, your first focus should be getting your income to a place that can support  active investing, which I would argue would be somewhere that $2k/yr doesn't matter one way or the other.

If you are already at that point where the money doesn't affect your ability to invest then an immediate 100% return on investment seems like a pretty good deal.

I just point this out because I think many people are focusing on the wrong problem when they look at this question.

Originally posted by @Daniel Kurkowski :

I think it depends on what your situation is and what kind of goals you have. 


Define the destination and the vehicle to get you there becomes much more obvious. 

@Mark Smith

I would continue to grow it and later transfer it to a self-directed IRA. The self-directed IRA can then be invested in physical real estate.

I killed my 401K earlier this year. While it has been earning at least 8-12% per year for the last 5 years, I am pretty good about earning 25% COC through real estate. Even though my company was matching 6%, it made little sense to keep it. I did not want to wait until I was 59 to touch that money. I could do so much more (recycle it) with it now.

Who knows if I even make it to 59. I live for today, and my real estate portfolio will be all the retirement income my family will need. 

It's actually a common misconception that you have to wait until 59 1/2 to access those funds. You can take advantage of a little known IRS rule called 72t which allows you to withdraw early if you're looking for early retirement.

@Mark Smith

I will 3rd what @Daniel Kurkowski said.  What are your goals and work towards them accordingly.  

If you decide to invest in 401K, make sure you find out what kind of funds your company offers and don't invest in high fee hedge fund type.  Roll them into low fee index fund like Vanguard S&P 500 index fund, etc.

Good luck figuring it out.


Nice one Nicholas, I know a good amount about taxes but had never heard of this 72t rule. Looking to retire soon and this will help me access funds quicker!

Investing in real estate and investing in a 401k aren’t mutually exclusive. You can do both. Both have their advantages/disadvantages, but there’s something to be said for having a diversified retirement plan. 

I used to be anti mutual funds and anti 401k as they come. After doing some honest research, I changed my mind a bit. I agree that real estate is more profitable (it has been for me), but it certainly takes a lot more of your personal time through the entire investing cycle. So if I contribute 20-25% of my investible capital to equities, I think this is a decent way to diversify and lower taxable income a bit. Also, given how hard it is to find a decent real estate deal these days, it doesn't hurt to add another passive way to grow wealth.

There are only 2 important and possible ways to get wealthy. #1 Have/learn a skill that is in high demand allowing you to make a high income #2 Start a profitable business. If you can't do one of these things, it doesn't matter what you choose to invest in, since you won't have the necessary amount of capital to significantly grow your wealth.

I have reduced my contributions to the point where I get a match, and I'm 90% index funds.

Reading on BP changed my mindset about over contributing. 

My husband has a nice match at his company. He has doubled his money .and it works for us. 401K and we also save separate from that plus have rental properties.

Lots of good advice here.

If your employer matches contributions, make the contribution to get the match..if you're planning to stay long enough to get vested.

If you plan to move on in a year but it takes more than that to start or fully vested, then don't bother.

You can invest in a 401k and save for RE.  Having diversified assets isn't a bad thing.

Invest in lowest broad based fund in your company's plan.  Don't put it in the money market. There will be some risk but long term it'll do ok.  

It's already been said above, but it depends on what your end goal is.  Around 35, I began investing in real estate in an effort to diversify my retirement income - not to replace my income and become a new career.  My goal is to have 3-4 different income streams in retirement.  Real estate and my 401ks are two of them.  

@Mark Smith so funny I am in the midst of this exact same decision in my life right now based on “Set For Life” that I am in the middle of reading!!

Currently I contribute 11% to my 401k. My plan, Mark, is to maximize the match which I am given through my 401k (6%) because it is free money from your employer and take that other 5% to begin acquiring assets.

Best of luck with your decision!!!

Hey @Mark Smith

My view on it is to at least contribute what your employer will match. I put in a little more, but am considering toning it back to focus more on beginning my REI adventure.

Mine matches up to 4% so I will always contribute that much.

Here's what works well for a lot of people. Obviously everyone is different.

1. Contribute enough to your 401K to get your full employer match. Use the Roth version whenever possible. Which fund you put it into is up to you. In mine, I started with the S&P index fund, then swung for the fences with small cap and international funds.)

2. For additional investment savings, you contribute more to the 401K, or save in an investment account outside the 401K. It's up to you.

3. When needed, take a loan from the 401K for a down payment (or purchase) to invest in Real Estate outside the 401K. The loan interest goes back to your 401K.

4. When you leave that employer, roll the 401K over to a Self-Directed 401K (not IRA). Your Self-Directed 401K can then invest directly in real estate, and/or continue doing loans. (Cashing out your 401K should be avoided).

  • The self-directed 401K works very similarly to the Self-directed IRA. There are some differences to be aware of.

There you go. Take advantage of the best elements from both the 401K, and Real Estate investing, and grow your wealth.

Have Fun!

Originally posted by @Rob Myers :

It's already been said above, but it depends on what your end goal is.  Around 35, I began investing in real estate in an effort to diversify my retirement income - not to replace my income and become a new career.  My goal is to have 3-4 different income streams in retirement.  Real estate and my 401ks are two of them.  

Well said. 

I'm fully retired now, just kept some paid off nearby rental properties. With the rental income, social security, some small pensions, my wife and I are doing OK without our 401K's paying the monthly bills, with a a thousand or two left over every month. 

I always invested into 401K's taking the match. We also invested into 529's for our children's college. My older girl is graduating college this June, and I am glad that we have the 401K's and 529's to pull us through.

First off, my girl is graduating college next year, debt free, thanks to the rental stream surplus mentioned before and the 529's. We had to dig into the 401K's once in 2011, $10K when we had unexpected expenses. We'll probably do it again next year, she's planning on graduate school, and we plan to cover most if not all of it.

And we can say we're glad we did what we did. About 15 years ago, I was stressed out from trading options and stocks in the 401K's that I just bought a handful of good solid stocks, some with good dividends and let it sit. There's enough bulk in this portfolio, and others managed an FA, that this year, with the market on a tear, the 401K's portfolios went up over $80K, in a year alone. I had a FA take a look at it since it's got $80K in cash accumulated. A good problem to have.

I'll be 70 next year, required to do withdrawals, so we'll invest the withdrawals, and at the same time cover a my daughters graduate study. My younger daughter has her 529's that should carry her for a while.

Now, I was able to do this because I had a good W2 job for a while, invested into the 401K, got the matches. At this stage, it's one more income stream I can use for my family's benefit.

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